Imbalances in the fiscal deficit debate

As someone who introduced the concept of fiscal deficit for the first time in the interim Budget of 1991 and later as finance minister in the Vajpayee government and also prepared the legislation for controlling the fiscal deficit, I have followed the recent debate in the media and read with interest T N Ninan’s article on the subject (“No virtue in stipulating 3%”, October 5).

The Fiscal Responsibility and Budget Management Bill was passed by Parliament after I had moved to the external affairs ministry and Jaswant Singh had taken charge of the finance ministry. The Act was brought into force by the United Progressive Alliance government after it assumed office in 2004. This showed the wide consensus within the political class for controlling the government’s runaway deficit. The target of limiting the fiscal deficit to 3 per cent of GDP was fixed in the Act, to be achieved over a period of years. The target was based on the recommendation of an expert committee, which had examined the issue in detail and studied global best practices.

Though the target was not cast in stone, the contemporary wisdom was that it was a reasonable one. But what is generally ignored by the commentariat today is the fact that the Act had also stipulated that the revenue deficit should be brought down to “nil” by the target date. The principle behind this was simple — that the government should borrow only to finance capital (investment) expenditure and most certainly not for generally unproductive revenue expenditure.

The logic was also clear: Investment expenditure would produce returns that could be used to service the debt and, thus, prevent it from becoming a burden on future generations. I always used a popular example to prove my point to the less initiated: If I borrowed money from a bank to set up a shop but instead spent it on my daughter’s wedding, I would not be able to return the loan when it became due, whereas if I actually set up a shop and earned an income from it, then debt servicing would not be a problem.

Illustration: Binay Sinha

It is true that though limiting the fiscal deficit was mandated by an Act of Parliament, it has been observed more in its breach by governments that have been in office since then, including the present one. What is worse, the FRBM Act has been amended through a provision in the Finance Bill year after year and, given the awareness or lack of it among our MPs, has hardly been debated in Parliament and passed without difficulty. So the whole concept of the fiscal deficit has gone for a toss all these years without a tear being shed.

It is also true that the government’s finances today are in a mess. And like some of its predecessors, this government, too, has been economical with the truth while presenting its Budgets and has dished out pure falsehoods in its Budget documents. The submission of the Comptroller & Auditor General before the Finance Commission would show that in 2017-18 the government passed on to its undertakings Rs 4 trillion or so, which should actually have been reflected in the Budget and which would have taken the fiscal deficit to 5.85 per cent of GDP that year. This practice of concealment of truth has been followed without challenge in all subsequent Budgets.

Then, there is a further concealment of the deficit amounting to Rs 1.70 trillion in the current year’s Budget by the simple device of taking the revised estimates of receipts of the previous year in the interim Budget presented in February although the “actuals” were available when the Budget for the whole year was presented on July 5. Media reports also suggest that direct taxes revenue grew only 5 per cent in the first half of the year and will have to increase by 27 per cent in the next six months if the collection target is to be met; an impossible task on the face of it.

On top of all this is the sacrifice made by the government in the recent bonanza of tax cuts announced for a handful of corporations, which would amount to Rs 1.45 trillion. No fiddling with figures would be able to hide from the people the reckless course the government has adopted as far as the fisc is concerned. Combine it with the sorry state of state governments’ finances and the overall national picture is truly frightening.

Returning to the issue of fiscal deficit, let me state clearly that I am not a fiscal fundamentalist. The target is not inflexible. We must, however, learn to distinguish between the fiscal deficit and the revenue deficit. If we can restrict the revenue deficit to zero, I would have no problem if the fiscal deficit is raised to even 5 per cent of GDP and the money thus raised is well spent. My quarrel with the recent corporate tax cut is that it is not the remedy for the current ills facing the Indian economy. The problem is on the demand side and the government is busy fixing the supply side. If Rs 1.45 trillion had been spent instead on agriculture, rural infrastructure, housing and infrastructure generally, then demand would have picked up almost immediately, providing much relief to corporations engaged in production. The euphoria this created in the stock markets has also waned, though it enabled some select operators in the market to make a quick killing —  but that is another story and must be dealt with separately.

India is a developing country and there is no dearth of demand. The government must come forward with spending on infrastructure and housing if the economy has to be revived, while at the same time, encouraging the private sector to play its role not necessarily through tax cuts but by creating opportunities for it to invest. This is what we did during the Vajpayee years when we had faced much stronger headwinds, including international sanctions after the nuclear tests.  
The writer is a former finance minister

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